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The Gold-Based Economic Netting System

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The existence of gold standard goes way back since the 1800s. Under this system, currencies are linked to a fixed quantity of gold and can be converted into gold at a specific price. Bank issued notes and certificates to people to transact with which was convertible to gold (Nyazee, 2008). Despite the long period of prosperity and stability that this system has created, the gold standard was abandoned by many countries during World War I in 1914. Although some countries returned to its adoption after the war ended, the abandonment of the gold standard by the Great Britain was said to be one of the causes of the Great Depression in 1930s. After the collapsed of the Bretton Woods System, the fiat monetary system rose to prominence in 1971. Given …show more content…

Therefore, contemporary scholars had come up with some suggestions to implement a new gold-based monetary system. Meera (n.d.) proposed the usage of gold as an alternative currency through the implementation of Interest-Free Gold-based Economic Netting System (IGENS). The mechanism of IGENS works when different parties in an economy give out and take up loans from each other or in other words, enter into credit contracts. These credits will be offset accordingly and only the balance will be paid periodically. For example, when two countries trade with each other, the gold accounting is managed by both countries’ central banks and only the net difference between the two is settled (Meera & Larbani, 2003). On top of that, the surplus amount can be carried forward to settle future transactions between the …show more content…

The three elements that are stabilizing in this system are - the usage of gold; the non-interest factor; and the netting system. Since gold by itself has value, it is superior from any other fiat currencies. Even though the price of gold does fluctuate, it does so in a minimal amount, usually by a few percentages up or down. Interest rates exist in an economy as a result of lack of liquidity. In a netting system, no shortage of money will take place which means that lenders could not take advantage of charging high interest rates to people that are in need of loans as is the case in the fiat money system. Hence, interest rates will be non-existent in the economy. As mentioned above, the netting system works through the offsetting of credits between

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